Investing is a Marathon
Kirk is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While I know that everybody likes to look for the hard sprint, the quick portfolio fix, the fast buck, or the great stock pick story, sometimes, slow and steady is what is truly beautiful. In the vane of slow and steady, Marathon Oil (NYSE: MRO), without being flashy, has been gradually shifting their business to take advantage of long-term growth trends in order to unlock shareholder value.
In 2011, Marathon made its biggest move by splitting its upstream and downstream businesses into two separate companies, with Marathon Petroleum (NYSE: MPC) the resulting refinery spin-off. Marathon Petroleum is a slow growth business that might pay a heady dividend over time, however, it did not fit in with Marathon Oil's longer term growth vision.
This week, Marathon Oil sold off its Alaska natural gas holdings in an effort to focus its domestic energy production even more on liquids. While it might be seen as selling near the bottom of the natural gas market, Marathon feels there is better short and intermediate term growth for oil in North America.
In looking to expand further into domestic oil, one need look no further than the company's career postings. In North Dakota, they are hiring multiple positions to take advantage of the growing Bakken shale play. This push on its oil production jives with the growth seen by other Bakken companies, such as Kodiak Oil and Gas and Oasis Petroleum, and the shifts made by majors such as Statoil and Chevron to become more involved in the Bakken oil shale.
Already, according to Marathon Oil's CEO and President Clarence P. Cazalot, the company has seen its Bakken production from eight rigs jump from 24,000 net barrels of oil equivalent per day (BOED) to 27,500 in the past four months. The company anticipates increasing BOED to 38,000 by 2016 from the Bakken shale. Another shale opportunity in North Dakota and Montana is also under study and could increase expectations and future production, creating potential for a very positive surprise.
The Bakken is complimented with Marathon's other large domestic oil developments, including the South Texas Eagle Ford, where the company has 17 rigs. In the lower 48 states, Marathon has a total of 33 rigs and is expecting a production jump of 30% in 2012 versus 2011, up to about 120,000 to 130,000 BOED.
Lest you think Marathon is a married exclusively to the domestic oil play, take a look at their overseas operations. Marathon, is engaged in oil and gas production in several strategic locations, including a new holding in the more stable Iraqi Kurdistan region, its core Norway North Sea operation, 1.2 million net acres in Poland for potential shale gas production and resource rich Africa.
The company's Poland shale gas acreage is very interesting as Europe, including Poland neighbor Germany in particular, are looking for further natural gas supplies in order to diversify away from volatile Russian natural gas deliveries. Marathon anticipates using the expertise it has developed in American shale plays to develop the Polish resources. At over $12/ptcf (per thousand cubic feet) for natural gas in Europe, versus around $2 in America, Marathon might have another major profit driver within a few years out of Poland.
Marathon's balance sheet carries about $4.2 billion in net debt (4.8b debt - $600m cash), however, free cash flow exceeds $2 billion per year making the debt very manageable. Return on assets has been rising the past three years and is about 9% now. ROA appears likely to continue to improve in coming years if any positive developments occur in Marathon's larger projects, which at least appears likely in the Bakken. Return on equity jumped to over 17% for 2011.
The company uses only about 20% of free cash flow to support a dividend currently yielding 2.3%. I would anticipate that dividend to increase particularly if the Polish development occurs over the rest of the decade.
Mr. Market appears to be giving long-term investors an opportunity to buy growth at a low price now as the stock has corrected down about 20% from its year to date high. So, stop looking to sprint, and get into Marathon now.
Kirk Spano and clients of his Wisconsin Registered Investment Advisor Bluemound Asset Management own positions in Kodiak Oil and Gas. Neither Kirk nor Bluemound clients have made any transactions in the previous 3 days or plan any transactions in the next 3 trading days in the mentioned company's securities. Opinions subject to change at any time without notice. Follow Kirk on Twitter @GALPinvesting or see his watch lists at www.GalpInvesting.com.
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